New Warning on Pension Withdrawals

New analysis shows ‘standard’ withdrawal rates may be unsustainable – with a one in five chance of running out of money

Emma Simon 13 February, 2017 | 10:38AM
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Since the new pension freedom rules were introduced – in April 2015 – almost half a million people have opted to take flexible payments from their pensions. This has equated to some £9.2 billion of retirement income according to latest figures.

But new research from pension provider Aegon, warns that many are taking unsustainable levels of income, which increases the risk of people outliving their pension funds.

Aegon said that many people have not sought financial advice on their retirement options. Instead some have relied on older calculations which suggest that taking a 4% income is sustainable over the long term.

This “4% rule” was developed by US adviser William Bengen in 1994, and has often been used as a rule of thumb for determining a sustainable level of retirement income. However, Aegon’s research found that in today’s economic climate a 65-year old with a low-risk portfolio has a one in five chance of running out of money over 30 years if they follow this strategy.

Calculating A Sustainable Level of Income

Aegon commissioned EValue – an actuarial firm – to develop its own analysis to help the millions of people in the UK now opting to take an income directly from their pension funds in retirement, rather than buying an annuity. Their analysis suggests that the maximum income pensioners should be taking should be 3.6% a year  – although in many cases this should be lower, depending on an individual’s life expectancy, investment portfolio and attitude to risk.

Aegon proposes a sliding scale, where people take an income from 1.7% to 3.6% - depending on circumstances. They urged those approaching retirement to seek advice, and get a more personalised income rate. They warned many pensioners may have to alter the income they draw down from pension funds if there is a change in their personal circumstances, or wider economic environment – or if investments do not perform as planned.

Steven Cameron, pensions director at Aegon said: “Planning a retirement income to last a lifetime is too important and complex to be boiled down to a simple rule of thumb. The 4% ‘sustainable income’ rule was developed in the US in the 1990s at a time when interest rates were significantly higher.

“More recent studies in the UK have brought this figure down, but any attempt to come up with a single number will never work across the wide range of clients with different life expectancies, risk appetites and capacity for loss.”

He said this sliding scale – between 1.7% and 3.6% - should only be a starting point. People should not assume that taking an income within this scale meant there was no risk of running out of money. 

Cameron added: “People that have other assets to fall back on outside of their pension may be more comfortable with a higher probability of their pot running dry in retirement while those relying on it as their sole income will want more certainty.”

Morningstar research revealed last year that the safe withdrawal rate for UK investors is around 2.5%.

More People Using Pension Freedom Rules

Figures released by the Government last month show that savers have accessed a total of £9.2 billion in the last two years, after the introduction of the pension freedom rules.

The number of people accessing their pension funds – and the amount they are withdrawing – have increased over the last year.

According to figures from HM Revenue & Customs, a total of 516,000 payments were made from pension pots between April 2015 and March 2016. But a total of one million payments were made between April 2016 and the end of last year.

The number of individuals accessing their pension on a quarterly basis has almost doubled from 84,000 in the three months to June 2015 and 162,000 at the end of 2016.

Are Investors Using Pension Freedom Rules Wisely?

However, many pension commentators called for more information to show how people were using the funds released from their pensions.

Steve Lowe, communications director of Just Group said: “We are now nearly two years into the new rules and, despite the official figures, we remain the dark about how many of those taking pension cash lump sums are thinking about their long-term financial security and how many are grabbing it to spend while they can.

“We need a lot more detail if we are going to identify and head off any future problems.”

AJ Bell pension expert Gareth James added: “Whilst it is good to see the pension freedoms are being utilised by a large number of people, it is dangerous to use the £9.2 billion as a measure of success when it doesn’t tell us what people are doing with that money.

“Are they using it to provide a regular and sustainable income as pensions are designed to do, or are they spending it too quickly, and running the risk of outliving their pension funds?”

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for

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